WASHINGTON – The Consumer Financial Protection Bureau has published a final rule On Tuesday, that makes it easier for payday lenders to extend high-interest loans to people who might not be able to repay them.
The CFPB rule overrides an Obama-era requirement that payday lenders must first assess whether someone taking out a loan can actually afford to pay it back. Essentially, it would have imposed the same responsibility on payday lenders as banks for granting long-term loans like mortgages.
Democrats and consumer advocates have accused the Trump administration of removing protections for the most vulnerable consumers amid a pandemic-induced economic crisis.
Senator Elizabeth Warren said the rule mocks CFPB’s mission to protect consumers and gives the industry carte blanche to trap vulnerable communities in debt cycles.
Short-term payday loans regularly carry interest rates above 300%; according to state laws, they may exceed 500% Where even 600%. Lenders often allow people to roll over their loans by paying fees to delay repayment.
This is called “loan attrition,” and this is how a two week loan can become long term debt. The CFPB’s own analysis in 2014, found that 80% of payday loans were either renewed or followed by another short-term loan within two weeks. Interest charges regularly exceed the initial principal of the loan.
“The consequences could be devastating,” said Mike Litt, consumer campaign manager at US PIRG, the federation of state public interest research groups. “If you’re already having problems as they are, taking out a payday loan could make a bad situation worse where you take loan after loan and fall into a debt trap because you couldn’t afford the first one.
The CFPB did not respond to a request for comment. In a press release, the agency’s director, Kathleen Kraninger, said the decision was taken to provide consumers with better access to capital.
“Our actions today ensure that consumers have access to credit in a competitive market, have the best information to make informed financial decisions and maintain key protections without impeding that access,” she said in the statement.
The “ability to pay” requirement was developed at the end of the Obama administration and finalized in October 2017. But the following month, the Trump administration appointed Mick Mulvaney interim director, and he announced that the implementation would be delayed. The administration then began the process of completely getting rid of the requirement.
In 2019, the Washington Post published audio leak from payday lenders discuss the need to raise large sums of money for Trump’s re-election campaign in order to gain the administration’s favor.
Ironically, some steps taken by the Trump administration to weaken the CFPB could end up being used to overturn the president’s policies.
The office was established after the 2008 financial crisis and designed to be independent from the president. Its directors would be confirmed by the Senate for five-year terms and could not be dismissed by the president without cause. The Trump administration argued in court that this was unconstitutional. Just last week, the Supreme Court agreed and ruled that the president can fire a CFPB director at will.
Democratic presidential candidate Joe Biden strongly hinted in a tweet that he would fire Kraninger.
Likewise, in 2017, the Republican-controlled Congress exploited the little-known Congressional Review Act of 1996 roll back dozens of Obama-era rules and regulations. If Democrats are successful in the November election, they could turn the tide and do the same with Trump’s rules.
Linda Jun, senior policy adviser at Americans for Financial Reform, said that if Biden wins, he would have several ways to reinstate the “ability to pay” requirement.
“I hope it’s high on their priority list,” she said. “Repayment capacity is a common lending principle. The idea that you should treat this like any other loan is the subject of this rule. That they say you don’t have to do that, I think it’s really confusing, especially when people are vulnerable.